Court of Appeal of Düsseldorf: state lottery- and sports betting monopoly is not justified

Rechtsanwalt Martin Arendts, M.B.L.-HSG

Court calls for a fair tender procedure for a privately owned gambling operator

By decision of 3 March 2008 (file-no. VII-Kart 19/07 (V)) the First Cartel Division of the Court of Appeal of Düsseldorf (Oberlandesgericht Düsseldorf) dismissed the motions of the State of Rhineland-Palatinate (Land Rheinland-Pfalz) and of Lotto Rheinland-Pfalz GmbH against a decision of the German Federal Cartel Office (Bundeskartellamt) to prohibit their merger. In its ratio decidendi the Court of Appeal of Düsseldorf raises fundamental doubts as to the legality of a state monopoly and, referring to the European Commission’s legal opinion on this matter, calls for a tender of the license so far granted to Lotto Rheinland-Pfalz GmbH.

By filing motions with the Court of Appeal, the state and the lottery company intended to obtain a decision, allowing for the state to take over the controlling majority of the lottery company, contrary to the Federal Cartel Office?s decision. The Federal Cartel Office had prohibited the State of Rhineland-Palatinate to acquire a majority interest of 51% in November 2007. Doing so, in its press release of 29 November 2007, the Federal Cartel Office emphasised that even highly regulated sectors such as the gambling industry were not „competition free zones“. Anti-trust law was applicable to them without any restriction.

Lotto Rheinland-Pfalz GmbH is the only lottery company in Germany not owned or controlled by the state. The shareholders of this GmbH (equivalent of a Ltd.) keep being the three sports federations of Rhineland-Palatinate (Sportbund Pfalz e.V., Sportbund Rheinhessen e.V. and Sportbund Rheinland e.V.). However, they were willing to cede a majority interest in return for an adequate guarantee by the state.

The Federal Cartel Office voiced considerable anti-trust related doubts regarding this nationalisation. With its lottery products „Zahlenlotto“, „Spiel 77“, „Super 6“, „Keno“ and „Glücksspirale“, which are sold over more than 1200 lottery counters, Lotto Rheinland-Pfalz GmbH disposes of a dominant market position. The State of Rhineland-Palatinate’s planned majority interest would even increase this dominant position. The merger would lead to a „structural alliance“ between Lotto Rheinland-Pfalz GmbH and Süddeutsche Klassenlotterie (a lottery operated by several German states), which would have largely eliminated the competition existing so far.

In its decision, the Court of Appeal of Düsseldorf considers the motions to be inadmissible already. Subsequently the court issues fundamental explanations as to the legitimacy of a state monopoly. According to the jurisprudence of the German Federal Constitutional Court and the ECJ a state lottery- and betting monopoly was only legitimate „in order and only as far as necessary to attain legitimate goals of common welfare“. The Court of Appeal doubts this with regards to the argument of fighting gambling addiction, which keeps being pleaded as justification:

„Fighting gaming- and betting addiction as well as effective consumer protection can (especially) be achieved by setting respective legal requirements and standards for the gambling business, and by adapted requirements for license holders as well as by a consequent supervision of the gambling operations. It is not necessary, that, additionally, the State of Rhineland-Palatinate has a majority interest in the operations entrusted with the lottery business and to exert dominant influence on the operation by means of its position as a shareholder.“

In the court’s opinion, a monopoly does therefore not stand up to the examination of its commensurability, since there are milder (and equally effective) means to combat gambling addiction and to ensure consumer protection.

The rule of non-discrimination does not necessitate this merger either. The state can have its gambling business operated by a private third party company. However, a tender was required to do so:

„However, it is necessary that the rule of non-discrimination is complied with and that a discrimination free tender procedure takes place accordingly. Should – as the European Commission seems to assume – the Lotto GmbH have been entrusted with the lottery business without invitation to tender, the private lottery undertaking will have to be determined in a transparent and fair competitive bidding in the future.“

The Court of Appeal granted leave to file a special appeal (Rechtsbeschwerde) with the Federal Court of Justice (Bundesgerichtshof). It can be assumed that the Federal Court of Justice will soon have to decide on the ban of this merger as well.